When the euro area will fall apart: the expert gave a forecast

— The euro has clearly not been feeling its best in recent months. What is happening with the single European currency now?

— The European currency is rapidly depreciating against the dollar and has already reached a 20-year low: the pair is trading near the 0.99 mark for the first time since 2002. In other words, for the first time in 20 years, the euro is worth less than the US currency. Recall that the euro is a young currency, which is only 24 years old, it was put into circulation only in 1999, so all the ups and downs of its exchange are so noticeable.

— And why did we witness such historical anti-records?

— The weakness of the euro is associated with the rapid deterioration of the situation in the European economy and the outflow of foreign capital from Europe to the United States. The pressure on the EU economy was exerted by the Ukrainian conflict and anti-Russian sanctions, which led to an energy crisis on the continent and exacerbated the problem of high inflation.

The energy crisis is growing in the Eurozone, the market price for gas has risen above $2,000 per thousand cubic meters. This is about 10 times more than Europeans paid for “blue fuel” in the last decade. At such prices, the EU industry is unprofitable and production is gradually being closed. European consumers are also forced to save, which leads to increased social discontent.

Following the cost of gas and against the backdrop of a drought, electricity prices in Europe update records. As a result, the euro is rapidly depreciating against the dollar, which also accelerates inflation due to the rise in the cost of imported goods.

– Because of this, the cost of all goods has risen to a record high in the EU?

— Yes, the rise in energy prices led to the acceleration of inflation in the eurozone in August to a record 9.1%. Let me remind you that the goal of the European Central Bank is its level of 2%. At the same time, the ECB cannot quickly raise the key rate, which was 0.5% in the first week of September, as this could provoke a debt crisis in the eurozone.

Business activity indexes indicate that the eurozone economy has been contracting for two months in a row – in July and August. Eurozone consumer inflation is expected to hit double digits in autumn. In the coming months, the economic situation in Europe will continue to worsen and discord in the EU will grow. Against this background, we predict further weakening of the euro to the levels of 0.90-0.95 dollars per unit of the European currency.

—Against this background, cautious forecasts are already being made about a possible collapse of the eurozone. How realistic is this development?

—From the very beginning, the problem of the eurozone was the inconsistency of monetary and budgetary policies. So, the countries of the eurozone have one central bank – the ECB – and at the same time their own government in each state, which independently determines its fiscal policy. This inconsistency, let me remind you, led to the debt crisis in the eurozone in 2009-2012. Then, due to the debt problems of Ireland, Greece and other southern European countries, there were significant risks of the collapse of the eurozone. But at that moment, the ECB printed a lot of euros and flooded all the problems with money.

What prevents the regulator from doing the same today?

— Now the ECB cannot print a lot of euros and inflate the money supply due to record inflation. On the contrary, the European Central Bank is forced to tighten monetary policy, that is, to raise the key rate, which also worsens the prospects for the European economy and increases the risks of a debt crisis. The most vulnerable to rising interest rates are the southern countries of Europe with a high level of debt – Italy, Greece, Spain, Portugal. It is in these states that they can talk about the benefits of returning to the national currency. Moreover, the political crisis continues in Italy: parliamentary elections are scheduled for September 25. Against the backdrop of a deteriorating economic situation and growing social discontent, populists may come to power who will begin to advocate increasing social spending, leaving the eurozone and returning to the national currency.

-And the position of Germany, the economic and political leader of the EU, will not save this time?

“Even in Germany, support for a single monetary union could be waning. The industry of Germany was largely based on cheap Russian gas. However, due to the Ukrainian conflict, Germany is rapidly moving away from gas supplies from the Russian Federation in favor of expensive LNG from the United States and other countries. With the onset of the autumn-winter heating period, the economic situation in Europe may deteriorate significantly. By the end of the year, the EU embargo on oil imports from Russia is expected to begin. This could further worsen the energy crisis in Europe. As a result, the number of those who want to negotiate with Moscow and ease sanctions restrictions may increase in Europe. However, in the event of a further deterioration in Europe’s relations with Russia, the risks of the collapse of the eurozone will increase significantly.

-What is in store for the euro as the world’s reserve currency?

— After Europe supported the anti-Russian sanctions and arrested the foreign exchange reserves of the Russian Federation, confidence in the euro as a reserve currency in the world fell. In addition, the situation was aggravated by the fact that Europe supported the US on the issue of Taiwan. For example, during a visit in early August by Speaker of the US House of Representatives Nancy Pelosi to Taiwan despite Chinese protests. Now, not only Russia, but also China and their allies will probably not buy American and European bonds, but will try to move away from dollars and euros. This significantly reduces the status of the dollar and the euro as world reserve currencies. In our opinion, the euro in the coming years will gradually lose its status as a world reserve currency and will gradually become a regional currency.

— How. in your opinion, will events develop in the eurozone?

— In the event of the collapse of the eurozone, several scenarios are possible. The most likely scenario is that some countries, such as Italy or Greece, will leave the eurozone and return to their national currencies. At the same time, the backbone of the eurozone – Germany, France, the Netherlands – will keep the euro.

In the event of a severe crisis and large-scale disagreements within the eurozone, there are risks that the euro will cease to exist altogether. All European countries can return to their national currencies or try to form a new union on other principles and with a different single currency.

— What threatens the weakening of the euro for the Russian economy?

Europe has always been one of Russia’s main trading partners. The Ukrainian conflict, anti-Russian sanctions, the withdrawal of European companies from our country have already significantly worsened economic relations between the Russian Federation and the EU. At the same time, a likely deep recession in Europe will put additional pressure on the Russian economy, as EU demand for Russian exports will decrease.

– That is, if the euro weakens, and the eurozone falls apart, then we will also feel bad?

— The weakening of the euro in itself does not pose a threat to the Russian economy. The weakening of the euro and the strengthening of the ruble makes European goods cheaper for Russian buyers. However, due to sanctions, Russia either cannot buy many European goods, or is forced to do so through third intermediary countries, which increases the cost of delivery and the goods themselves.

— Do citizens of our country urgently need to close accounts in euros and switch to other currencies?

— In our opinion, the European currency will remain weak in the coming years and will carry increased risks for Russians. It is not for nothing that the Bank of Russia is consistently pursuing a policy of de-dollarization of the Russian economy, which in the current realities should be understood more broadly – as a policy of moving away from the dollar, euro and other currencies of unfriendly countries. Europe has already banned the import of euro cash into Russia. European banks are particularly fond of Russian money and there are significant risks of freezing funds. There is a possibility that Europe will impose sanctions on the Russian infrastructure of the euro exchange trade – on the National Clearing Center. This will make exchange trading in European currency impossible.

Against the backdrop of these risks, Russian banks and other financial institutions are introducing increased fees for storing and transferring dollars and euros. We believe that in the coming months and even years, the Russian financial system will continue to move away from the currencies of unfriendly currencies in favor of the ruble and friendly currencies – these are the Chinese yuan, the Indian rupee, the UAE dirham, the Hong Kong dollar, the Turkish lira. We advise you to take all this into account when clients want to make a decision on the currency of savings, but in any case they make the choice on their own.